Why Europe got rich, and China didn't

Two Paths to Prosperity, by Avner Greif, Guido Tabellini, and Joel Mokyr

Few historical problems are more fascinating and absorbing than the question of how the world became rich. Before the industrial revolution, wages fluctuated with the population. Too many people, and the market had excess supply: there are only so many men who can work in a field: wages went down. With a shortage, such as after a plague, the situation was reversed, and wages rose. This was a basic fact of life for many generations. Human living conditions were relatively fixed. And they were fixed at the mercy of the frost and the bacterium.

Technology decoupled wages from population. Lathes and looms and steam power and dozens of other creations meant that productivity could increase and population could increase. It was no longer the case that only so many men could work the field. More and more could be done with less and less. If the field was full, you could spin textiles, produce buttons, make pottery. Humankind escaped the trap: more people no longer meant lower wages. Now it meant better living conditions. Better and better for two hundred years. The period that economists call The Great Enrichment has so far led to a 3,000% increase in real income per person. Three thousand percent.

Everything we take for granted about the modern world—clean drinking water on tap; telephone lines; access to emergency medical care; rising life expectancy; labour-saving devices like washing machines; trains, planes, and automobiles; paperback books; shop-bought marmalade; Radio 3; a plethora of music live or recorded; reliable lights; houses that don’t get so cold in winter that the water freezes inside as well as out; indoor plumbing—all this and so much more stems from that Great Enrichment.

Nor is this an isolated story of enrichment. The improvements we enjoy in education, political freedom and criminal justice are all part-and-parcel of the Great Enrichment. It is in those societies that have the resources to solve problems where the liberal ideal prevails. What use are political rights in a world where the field can only accommodate so many men to dig and thresh? Of what good does it do to talk of equality and liberty in a world where the harvest might fail several years in a row and the toothache might be deadly? An awful lot of the areas of human life over which we have democratic government simply wouldn’t have existed.

For the Married Women’s Property Act to be meaningful, people needed to have more property to own than the tools of their trade and the clothes on their backs. For the welfare state to exist, there must be something to redistribute. For freedom to prevail, we must have things we are free to go and do. The Great Enrichment has been the means by which we invented the world in which we wish to live, the world which we still wish to be part of improving. It is the very fact of improvement that lies at the heart of this historical process. According to Dr. Johnson, thousands starved to death in London every year in the eighteenth century. The Great Enrichment is about a great deal more than vanity. It has been the great lever of moral progress in the modern world. And as global poverty rates continue to fall—along with infant mortality, illiteracy, autocracy—the Great Enrichment continues to liberate people today.

This is why it matters that we understand how the West became rich. We want to put everyone in the world on Western living standards. To understand what might happen in the future, we need to understand what happened in the past.

Although the Great Enrichment began in the West, a thousand years ago China was ahead of Europe. Around the turn of the millennium, China’s population was one hundred million, China was the world’s most populous trading area, and there were many agricultural innovations at work, including irrigation, crop rotation, and fertilizer. Europe had slower population growth, no cities like the million-peopled Kaifeng, and primitive agriculture. Francis Bacon said there were three major inventions of the millennium—the printing press, gunpowder, and the compass. They were all made in China. As early as the twelfth century, Chinese ships navigated to India and East Africa. China enjoyed foreign trade and the state issued paper money, which the economists Avner Greif, Guido Tabellini, and Joel Mokyr, who have written a new history of European and Chinese prosperity, call “an epochal invention.”

And yet. China lost its lead. Nine hundred years later, in 1850, Europe was not only dominant in power terms, but Chinese GDP per capita was one-fifth that of Britain. China not only lost its capacity for innovation. The state lost the ability to collect taxes, with revenues dropping to less than 2% of GDP.

What happened?

In Two Paths to Prosperity, the economic historians Avner Greif, Guido Tabellini, and Joel Mokyr (who just won the Nobel Prize for economics) offer an explanation for this “great reversal”. The answer, in a word, is “culture.” There are several important ideas contained in that word. Greif, Tabellini, and Mokyr talk about a “set of cascading, long-lasting transformations in cultural, social, and institutional environments” that account for the divergence. In summary, they are:

• Europe was more decentralized, or polycentric, while China remained centralised and autocratic. One result of this was that innovators in Europe found it easier to avoid censorship, able to move to another regime. Recurrent wars between fragmented European states also led to increased tax capacity.

• Europe developed a universalistic value system, in which moral sentiments are not fixed to kinship. China remained communitarian, and altruism operated through familial and close social networks. In the words of one economist, this difference is summed up like this: “a communitarian is a great friend to have, while a universalist is a great stranger to encounter.”

• These value systems have bigger implications. China worked (and works) on kin-based networks, where Europe worked with corporations and social activity between unrelated people. These corporations arose in the Middle Ages, showing the deep roots of the Industrial Revolution.

• In China, Confucian ideas dominated the culture, with an emphasis on hierarchy and obedience. China was thus a clan and kin society. In Europe, the Church banned or discouraged cousin marriage, polygamy, non-consensual marriage and other kinship practices, as well as favouring bilateral descent, not merely patriarchal descent (with the result that kinship becomes too difficult to keep track of: the family tree is simply too complicated).

• China controlled knowledge accumulation through the state. Schooling was undertaken as preparation for civil service exams. There was plenty of human capital, but it was trained in a way that had no “spillover benefits” into technology or useful knowledge.

If you want to know why the world got rich, that final phrase is the answer. Useful knowledge. The “driving force” of the Industrial Revolution was not the luck of geography. The coal was sitting in the ground for a long, long time before anyone had any idea what to do with it. Indeed, it was being used to heat homes, boil soap, brew beer, bake bricks, and blow glass long before the Industrial Revolution. No, what changed the world was the ingenuity of man—what the authors call “the kind of knowledge that potentially can be applied to some productive purpose.” Or as Deirdre McCloskey has phrased it “the creation of new ideas in human minds.” It is that which provides the “oomph sufficient to explain the Great Enrichment.”

Many people would now attribute Europe’s riches to colonialism. But whereas the origins of the ideas that caused the Enrichment were Europe-wide, colonialism was not. England lost the American colonies during the Industrial Revolution, and France lost Haiti. Spain and Portugal were colonial powers, but not Industrial ones. And trade with the Mediterranean and Baltics wasn’t imperial. Empire wasn’t irrelevant, and it was violent, but it isn’t the solving fact of the great question.

Instead, Greif, Tabellini, and Mokyr say, the Industrial Revolution was “the culmination of several long and drawn-out processes that started many centuries before James Watt and Richard Arkwright.” The evolution of Western universalistic, individualistic morality dates back to antiquity. Greif, Tabellini, and Mokyr link their ideas back to Aristotle, the fall of Rome, and the proliferation of self-governing institutions of the Middle Ages. The Catholic Church, as they say, was the mother of all European corporations. All those associations of de Tocqueville, and the little platoons of Burke, and the great social movements of the modern era—they all sit in a long line of descent.

Meanwhile, China was organising itself in clans. Women typically joined their husband’s paternal family. Worship was not organized through churches or with priests: it happened in the family, and was focussed on ancestors. In Europe, the authors say, the church organized the family; in China, it was the reverse. In Europe, the battle of the ancients and the moderns was won by the moderns, and as early as 1700. Confucianism didn’t fall until it was replaced with Marxism.

This precluded many of the institutions that made Europe prosperous: guilds, joint ventures, merchant financing, apprenticeships, self-governing cities. In China, migration was based on family ties. In Europe, people moved as families, and groups of unrelated individuals formed new corporations. This, indeed, is how the USA began. So deeply seated are these ideas and beliefs and norms that the modern business corporation emerged quite late in China.

The short story, then, is that the collapse of Rome meant Europe lacked central political authority. This fragmented, polycentric model led to corporations, self-governing entities, which all had to cooperate in Parliaments (something else China never developed, nor the Middle East). China remained hierarchical; Europe was more voluntary. Monasteries increased literacy and promoted the value of labour, thus improving human capital; the Chinese education system led to conformity.

We are still living in history today. In 1978, China had 23% of the world’s population and 3% of the GDP. In 2019, per-capita GDP was 23% of that of the USA, accounting for 18% of world GDP. It’s an astonishing development, even though China remains a relatively poor country in per capita terms. Why it happened is hard to say. Property rights have not been respected. Clans and kinship networks were remarkably resilient during Mao’s terror. But private firms organise around these kinship ties and people find jobs through their networks. There was also a lot of foreign investment, especially from Hong Kong.

It remains to be seen what happens next. China relies on innovation from abroad. As in the past, the whims of the central authority might one day prove inhospitable for prosperity. Europe has been decentralized and spontaneous for hundreds of years. There was extensive migration and resettlement in the High Middle Ages. China is still a strong central authority, even though post-Mao it has more decentralised governance.

These cultures run deep. Modern survey data still shows that Confucian values correlate with support for autocracy. Checks and balances—the essence of liberal democracy—are known to have existed in some medieval organizations. European law evolved to be impartial; Chinese punishments were adjusted depending on the individual. The European Marriage Pattern (later marriage, nuclear families, moving away from relatives) evolved early, while in China couples married young.

Greif, Tabellini, and Mokyr have hundreds of pages of this evidence, summarising large amounts of modern scholarship. The book is sometimes repetitive, and has many internal references, but it is an undeniably compelling piece of work.

Such books are often written in a dry and neutral manner. There is something inevitably cautious and careful about the prose style of a joint work by three economists. But I read this book with a great deal of fascinated affection. The story of human history—of the great migrations of the High Middle Ages and the clannish insularity of the Chinese state, of the European explorers and the half-century of non-exploration initiated by the Chinese state in the fifteenth century—these are all the stories of real people.

On every page, I thought of the men and women, the ones marrying late, marrying into control, marrying into freedom. I thought of the men who were able to leave the work of the field, and the ones who were not. In every sentence of this well-assembled chronicle, it is impossible not to think of the apprentices working their craft in London and the anxious young men sitting the unforgiving civil service exams in China. In polycentric Europe, failure meant opportunity; in China, it meant disgrace.

History is the greatest of all human dramas. The history of enrichment and non-enrichment is the history of early deaths or of living long enough to know your great-grandchildren. It is the history of being forced to marry in your clan or of being free to escape your parents, your village, your class. It is the history of never leaving your home or of being able to ride a bicycle to the great city. It is the most exciting story ever told. We don’t have most of the words of the players. That is all gone with the wind. But in a book like this we can glimpse the happenings. We can imagine the dread of living at subsistence level or the tensions of living in an age when you can see the ships coming into harbour.

Two Paths to Prosperity isn’t only an economic history: it is a demonstration of the humane aspect of economic thinking. The authors write:

Despite the often heard notion (proposed mostly by non-economists) that economists believe that most economic interactions are driven by self-interest and greed, many of them have thought long and hard about what happens when people are motivated by “intrinsic motives”

If you believe in the vast impersonal forces of history, economics looks grimly impersonal. But once you are attuned to the decentralised nature of Western life—once you see that everyone is like an attendant at a railway station, the only one in their sphere with the local, tacit knowledge required to make the decisions necessary, even though they are also part of a larger collective—you realise that books like this are not part of the dismal science, but are a contribution to the greatest story ever told—that of the lives of all the people throughout time and around the world who make and have made each other’s lives a little better every day.